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The Benefits and Problems with Credit Consolidation
Ah yes, credit consolidation... The magic word of the masses. I would like to tell you up front that there is no magic package. You may be getting a good deal, but your debt problems will not disappear on their own. Debt consolidation is used as a magic phrase to lure in customers and to make them think they will be sooo much better off.It seems obvious that I don't think to highly of this area of finance, but in fact, this is not true. Debt consolidation is one of the best ideas lately, my problem with it is that people think it's like a "debt-be-gone" cleaner. The idea is great, but the way some companies use their clients, and the fact that people let themselves be mislead makes me so sad.
What is Credit Consolidation?
Think of credit consolidation as your luggage when you go on holiday. You could just put all your clothes, laptop, books, etc into the car, just throw them in, any old way, but isn't it much easier if you pack them together into one big bag, and just put that in the car? It saves a load of time and is easier to manage.
Debt consolidation is analogous to the above. You owe your credit card company, you owe various service providers (bills), if you have a company you may owe other companies money too. These debts all have different maturities (debt period), interest rates, they all have to be paid to different people, different amounts each month, maybe even some have to be paid yearly... A logistical nightmare. Go to a bank, ask for a debt consolidation deal and after that you will only have to pay the bank, once a month.
How this Works
What the bank is essentially doing, is paying all your debts for you, and asking you to cover it. For you this is great because your life just got easier, for the bank your biggest logistical nightmare is all in a day's work, so it's a win-win situation right? Well... If you're lucky, although the institution consolidating your loan will be a bigger winner.
The banks look at the interest rates you pay and the amounts you pay it after and give you an interest rate that is somewhere near the average. You can be sure that it will be higher, but it won't be as big as the largest. This is only the most basic case, banks look at a load of other things and will charge cost for handling and logistics and things, although they may incorporate it into the interest.
Herein lies my problem with consolidation. The only thing it (usually) makes easier is managing debt. You will almost certainly end up paying more, whereas if you would take 1 hour every week to go over your debts you could do it yourself. It is essentially a loan for the lazy, it just seems like a better way out. Of course for some people the big issue is not the money, it's just not wanting to do the work associated with paying debts, for them it's a great construction. For those who are really in a bad debt situation I seriously doubt they will be better off with a consolidation.